Iceland's centreback Aron Palmarsson jumps to shoot during the men's preliminaries Group A handball match of Iceland vs Argentina during the London 2012 Olympic Games on July 29, 2012 at the Copper Box hall in London.

Iceland, the smattering of fans were chanting Sunday morning in heavy Nordic accents, as the Icelandic handball team put the finishing touches on its 31-25 win over Argentina in the opening game of the Olympic tournament. After the final horn sounded, the team exchanged hugs and high-fives and waved towards Olafur Ragnar Grimsson, the silver-haired president of the volcanic North Atlantic island nation, who was sitting in the sixth row of the Olympic handball arena. He applauded back, beaming.

As Grimsson filed out of the arena, he stopped for an impromptu interview. Some heads of state, it seems, are a bit more accessible than others.

We start talking about the impact of this team in Iceland. “Handball, for us, has become not just a sport, but the core of the national spirit,” Grimsson says. Can anyone honestly say the same about any single U.S. Olympic team? No way. “I’m here not just as a great fan of the team,” says the Icelandic president, “but to also pay homage to what they’ve done.”

No group of Olympic athletes is more crucial to a nation’s psyche than the handball team from Iceland. Handball — essentially, a sport organized somewhat like soccer, except you use your hands, instead of your feet, to fire a ball past a goalie — doesn’t register in the United States, and many other countries outside Europe. But in Iceland, the sport is a national obsession. “We call them ‘our boys’,” says Ingibjorg Bergos Johannesdottir, an executive board member of the National Olympic and Sports Association of Iceland, while cheering wildly for the team in London. “If they are not doing very good, they are just ‘the boys.'” She stressed, five times, that she was just kidding about that. “Any 10-year-old here can tell you all the names of the players on the national team,” says Sigudur Thorolfsson, news editor for 365 Media, an Icelandic newspaper publisher and television network. “They’re like Wayne Rooney in England.”

In 2008, the team delivered the greatest sports moment in the nation’s history: a surprise run to the Olympic gold medal match in Beijing. Although Iceland lost to France in the final and came home with a silver, 40,000 people — that’s 12.5% of the country’s population of 320,000, about the size of Santa Ana, Calif., or St. Louis — welcomed the team home in Reykjavik. Iceland became the smallest country ever to medal in an Olympic team sport. Over 80% of the country watched the final match on television, and Grimsson granted the team the “Knight’s Cross,” one of the highest honors in the country.

Just a few weeks after this euphoria, however, the Icelandic economy cratered, in one of the most spectacular crashes of the late-2008 global financial crisis. “We had this extraordinary contrast,” says Grimsson. Iceland’s banking sector had ballooned to unsustainable levels: together, the country’s three biggest banks held assets that were nearly 10 times the country’s GDP. Following banking deregulation in the late 1990s and early 2000s, an economy long driven by fishing, metals-smelting and tourism fancied itself a Wall Street in the Arctic. “Iceland somehow became the money capital of the world,” says Johann Johannsson, an Icelandic television actor who, along with his 13-year-old son, wore national team jerseys and waved Icelandic flags during the opening handball game in London. “It was ridiculous.”

As the global markets fizzled and international investors pulled money out of Iceland’s financial institutions, the Icelandic government let the banks fail. The value of the Icelandic currency, the krona, sank against the euro. The stock market dived, and inflation skyrocketed. In September of 2008, Iceland had a 2.6% unemployment rate. Just eight months later, unemployment was at 11.2%. Few countries had fallen so far, so fast.

During these terrible times, the sport served as a welcome diversion. “No one wanted to think about the crisis,” says Thorolfsson. “We just wanted handball.” The team’s players, who had family and friends impacted by the crisis, but were mostly shielded from it themselves thanks to their pro careers in European handball leagues, were reminded of their importance. “People would tell me, ‘I don’t have any money,” says Asgeir Orn Hallgrimsson, an Icelandic player, “‘but I have handball.'”

In January of 2010, with unemployment still at hovering near 8%, Iceland won another surprise medal at a major tournament, a bronze at the 2010 European championships. The country’s struggles motivated the team. “We wanted to do a good job for our nation,” says Gudmundsson, the Iceland coach. “We were thinking about this, because a lot of people had a hard time.”

Luckily for Iceland, the economy has bounced back. Unemployment is down to 5.2% — still well above the 2.6% levels before the crisis, but a dramatic improvement — and GDP is growing at its fastest pace since before the collapse. In March, Iceland repaid $900 million in loans to the International Monetary Fund, and followed that up with a $483.7 million payback in June.

Grimsson, who was elected to a record fifth term as president on June 30, sticks by Iceland’s choice to let the banks fail. “It was absolutely the right decision,” Grimsson says. He attributes Iceland’s recovery, in part, to a reallocation of resources. “Paradoxically, the Icelandic banks, like banks in America and Europe, had in fact become high-tech companies, hiring engineers and mathematicians, computer scientists,” Grimsson says. “When they collapsed, all of a sudden this pool of technical talent was available. A lot of high-tech and IT companies were then able to get the people to drive the growth forward. This carries a very interesting lesson, that a strong banking sector, even a very successful banking center, is in fact bad news, if you want your economy to excel in the IT and the technology-driven sectors of the 21st century.”

Grimsson, and other Icelanders, give handball credit for the comeback too. “A nation, after an initial shock, decided to move forward,” says Grimsson. “And the handball team played a big role in that.” Thorolfsson, the news editor, remembers how the team’s star player, Olafur Stefansson, carried himself in Beijing. “He never spoke about how small our country is,” says Thorlofsson. “He only spoke about what people can do with mind power. That moved into the soul of the Icelandic people.”

Still, like most countries around the globe, Iceland is more fragile now than it was during the Beijing Olympics. “There are mental scars,” says Johannsson, the actor and fan. A repeat run in London would be even sweeter. On Tuesday morning in London, the team beat Tunisia, 32-22, in its second game. “I have said to the nation that we should not in an arrogant way demand another medal,” says Grimsson.

As the president left the arena, I ask him if he had any final thoughts. “My last word to the American audience is to start playing handball,” Grimsson says. “It’s a fun game.”